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Monday, August 31, 2015
Markets decline on China woes and rate hike concerns
Dow sank 145, decliners over advancers 3-1 & NAZ dropped 39. The MLP index fell 4+ to the 354s & the REIT index lost 2+ to the 302s. Junk bond funds drifted lower & Treasuries rose. Oil ran into selling after last week's advance & gold was also lower.
China’s
stocks fell, capping the benchmark index’s biggest 2-month tumble
since 2008, amid concern that gov intervention to prop up the
market will fail.
The
Shanghai Composite Index dropped 0.8% to 3205. The gauge lost 12% this month after sliding 14% in
Jul. The SSE 50 Index of the nation’s biggest stocks rebounded 6.7% from its intraday low. Bearish bets in the options market climbed as traders weighed
the level of state support before a WW II victory parade this
week. The Shanghai Composite closed near its highest level of the
day for the 3rd straight session amid speculation state-backed funds
are using afternoon share purchases to bolster the market before the
parade, which the gov will use to demonstrate its rising military & political might. Swings in Chinese markets this month have rattled
investors worldwide as they struggle to anticipate policy actions in the economy. The gov revived its intervention in equities on
Thurs to halt the biggest selloff since 1996. The effort to support
markets was part of a broader push to ensure nothing detracts from the
parade. China’s financial markets will be shut Thurs & Fri to
commemorate the event.
China’s
securities regulator asked brokerages to step up their support for
share prices by contributing 100B yuan ($15.7B) to the
nation’s market rescue fund & increasing stock buybacks, according to
leakers. Investor sentiment is getting
increasingly pessimistic. Puts that pay out on a 10% drop in the
China 50 exchange-traded fund cost 9.3 points more on Mon than calls
betting on a 10% gain. As recently as last Mon, the bullish contracts were
more expensive.
Federal Reserve Vice-Chair Stanley Fischer, in a speech at Jackson Hole, provided a detailed description of the conditions
the Fed is seeking before pulling the trigger on an interest rate hike;
he suggested the Fed is confident the US economy is headed in that
direction; but he gave no clue as to when it might happen. Fischer addressed the recent turmoil in global markets, noting that it would have an impact on US monetary policy. "In making our monetary policy decisions, we are interested more in
where the U.S. economy is heading than in knowing whence it has come.
That is why we need to consider the overall state of the U.S. economy
as well as the influence of foreign economies on the U.S. economy as we
reach our judgment on whether and how to change monetary policy,"
Fischer said. "That is why we follow economic developments in the rest of the world
as well as the United States in reaching our interest rate decisions.
At this moment, we are following developments in the Chinese economy
and their actual and potential effects on other economies even more
closely than usual," he added. Fischer also reiterated the Fed's long-held position that rates could
start moving higher before inflation reaches the Fed's goal of 2%
annual rate. However, again repeating a long-held & often-stated
position, he said the Fed would take a "cautious" approach toward
raising rates. "There is good reason to believe that inflation will move higher as
forces holding down inflation dissipate further," Fischer said, citing
the fading impact of a highly-valued dollar, volatile energy prices & a
tightening jobs market. Bcause of Fed optimism with regard to the trajectory of inflation
"we should not wait until inflation is back to 2% to begin tightening."
But "we will most likely need to proceed cautiously in normalizing the
stance of monetary policy."
Wal-Mart, a Dow stock & Dividend Aristocrat, in the
midst of spending $1B to raise employees’ wages & give them
extra training, has been cutting the number of hours some of them work
in a bid to keep costs in check. Regional executives told store managers at the annual
holiday planning meeting this month to rein in expenses by cutting
worker hours they’ve added beyond those allocated to them based on sales
projections. The request has resulted in some stores trimming hours from their
schedules, asking employees to leave shifts early or telling them to
take longer lunches, according to more than 3 dozen employees. The reductions started in the past several weeks, even
as many stores enter the busy back-to-school shopping period. CEO Doug McMillon is trying to balance a desire
to improve service, partly through increased spending on his workforce, against investors’ pressure to keep profit growing. Labor costs,
which rose after it increased the minimum wage to $9 an hour in
Apr, have weighed on earnings, which missed expectations last qtr. At the same time, WMT is trying to maintain low prices to fend off rivals. The stock fell 33¢. If you would like to learn more about WMT, click on this link:
Stocks are being sold on increased worries about the Chinese economy & stock market. Uncertainty about the interest rate hike is adding to nervousness in the market. This is traditionally a holiday week, but may not be much of a holiday for many investors. Dow is down more than 1K in Aug, a month to remember.
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